BoE raises short-run CPI forecast, sees sluggish growth

Reuters Staff

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The Bank of England is seen against a blue sky, London June 15, 2012.Paul Hackett

LONDON (Reuters) - Inflation is likely to be significantly higher over the next 18 months than expected in August, Bank of England forecasts showed on Wednesday, posing a barrier to further policy stimulus.

In its quarterly Inflation Report, the central bank's projections showed it would take until the third quarter of 2014 before inflation fell below its 2 percent target, nine months later than predicted in August, despite sluggish growth.

The Bank forecasts come a day after official data showed the biggest jump in inflation in more than a year, to 2.7 percent in October, after a rise in university tuition fees. Higher utility bills are likely to push inflation higher, with the Bank seeing a peak in the middle of next year.

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Britain exited recession in the third quarter helped by one-off factors, but underlying growth remains weak, as the euro zone debt crisis, government austerity measures and banks' reluctance to lend weigh on the economy.

"Strains in the euro area (are) posing the greatest risk to a sustained recovery. The strength of the recovery will also depend on the vigour of any revival in productivity growth," the Bank said.

Governor of the Bank of England Mervyn King speaks at a business conference in London July 26, 2012.Alastair Grant/Pool

The central bank decided last week not to buy more government bonds, as policymakers pin their hopes on a bank lending scheme and some worry about inflation and doubt the effectiveness of asset purchases in boosting the economy.

The Bank said that this Funding for Lending Scheme was helping to ease credit conditions, although it could be some time before this led to more lending.

Inflation in two years' time is predicted to be around 1.8 percent, just above Augusts' forecast of 1.7 percent and in line with how economists had expected the Bank to revise its forecast.

Inflation has not been below its 2 percent target since November 2009 and hit a five-month high last month, putting in doubt a much hoped-for revival of consumer spending because wages are rising at a much slower pace.

The BankBank forecastforecast that the economy would pick up gradually and would grow at an annual rate of 1.9 percent in two years' time, just below its August prediction of 2.0 percent expansion.

"The Committee attaches even less weight than in August to the possibility of a rapid pick-up in growth. Indeed, GDP growth is more likely to be below than above its historical average rate over the entire forecast period," the Bank said.